Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 15.1, Problem 1CC
With corporate income taxes, explain why a firm’s value can be higher with leverage even though its earnings are lower.
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Students have asked these similar questions
Which of the following can be the effect of leverage on the WACC if corporate taxes are considered?
Increased leverage will decrease the WACC.
An increase in leverage will be offset by a decrease in equity financing, thus leaving WACC unchanged.
Increased leverage will increase the WACC.
Changes in leverage will affect the WACC only if the interest rate on debt changes.
Which of the following statements is most accurate?
A.
Financial leverage is directly related to operating leverage.
B.
Increasing the corporate tax rate will not affect capital structure decisions.
C.
A firm with low operating leverage has a small proportion of its total costs in fixed costs.
D.
Total costs can be calculated as net income minus total revenue.
Which of the following statements is CORRECT? *
A company can use its retained earnings without incurring a flotation cost. As a
O result, while the cost of retained earnings is not zero, it is usually less expensive than
the after-tax cost of debt.
The capital structure that minimizes a company's weighted average cost of capital
often maximizes its stock price.
The capital structure that minimizes the firm's weighted average cost of capital often
maximizes its earnings per share.
If everything else is stable, and corporate tax rates drops, the Modigliani-Miller tax-
adjusted tradeoff principle implies that companies should expand their use of debt.
When a corporation learns that the cost of debt is less than the cost of equity, rising
the debt ratio would lower the WACC.
Chapter 15 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CCCh. 15.4 - How does this personal tax disadvantage of debt...Ch. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...
Ch. 15 - Prob. 1PCh. 15 - Grommit Engineering expects to have net income...Ch. 15 - Suppose the corporate tax rate is 40%. Consider a...Ch. 15 - Braxton Enterprises currently has debt outstanding...Ch. 15 - Your firm currently has 100 million in debt...Ch. 15 - Arnell Industries has just issued 10 million in...Ch. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Safeco Inc. has no debt, and maintains a policy of...Ch. 15 - Rogot Instruments makes fine violins and cellos....Ch. 15 - Rumolt Motors has 30 million shares outstanding...Ch. 15 - Summit Builders has a market debt-equity ratio of...Ch. 15 - NatNah, a builder of acoustic accessories, has no...Ch. 15 - Restex maintains a debt-equity ratio of 0.85, and...Ch. 15 - Acme Storage has a market capitalization of 100...Ch. 15 - Milton Industries expects free cash flow of 5...Ch. 15 - Prob. 17PCh. 15 - Kurz Manufacturing is currently an all-equity firm...Ch. 15 - Rally, Inc., is an all-equity firm with assets...Ch. 15 - Prob. 20PCh. 15 - Facebook, Inc. had no debt on its balance sheet in...Ch. 15 - Markum Enterprises is considering permanently...Ch. 15 - Garnet Corporation is considering issuing...Ch. 15 - Suppose the tax rate on interest income is 35%,...Ch. 15 - With its current leverage, Impi Corporation will...Ch. 15 - Colt Systems will have EBIT this coming year of 15...Ch. 15 - PMF, Inc., is equally likely to have EBIT this...
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- What would be a reason a company would want to understate income? A. to help nudge its stock price higher B. to lower its tax bill C. to show an increase in overall profits D. to increase investor confidencearrow_forwardWhat would be a reason a company would want to overstate income? A. to help nudge its stock price higher B. to lower its tax bill C. to show a decrease in overall profits D. none of the abovearrow_forwardThe higher the firm's tax rate, the lower the firm's after-tax cost of debt and WACC will be (other things held constant.) TRUE Or False?arrow_forward
- Which of the following makes this a true statement? In this slightly more realistic world with corporate taxes, managers can: Multiple Choice maximize the firm's value by taking on as much equity as possible. maximize the firm's value by taking on as much debt as possible. minimize the firm's value by taking on as much debt as possible. maximize the firm's value by financing only with debt.arrow_forwardIf a firm's marginal tax rate is increased, this means that other things held constant, lower the cost of debt used to calculate its WACC. True Falsearrow_forwardIf the corporate tax rate is greater than zero, how would taxes affect the firm's cost of capital?arrow_forward
- Under the trade-off theory, lowering the corporate tax rate will incentivize companies to increase the ratio of debt in their capital structure. Question options: a) True b) Falsearrow_forwardRegarding the trade-off theory, a firm would reach its optimal capital structure if the tax savings from additional leverage are offset by the increased costs of distress. the present value of the tax shield exceeds the value of the all-equity-financed firm. additional borrowing results in lower financial distress costs. additional borrowing is offset by the interest tax shield.arrow_forwardIf you take corporate taxes and the cost of financial distress are into consideration, the market value of a firm should equal the value of the all-equity firm the present value of the tax shield the costs of financial distress. O plus; plus O plus; minus O minus; minus O minus; plusarrow_forward
- Which of the following will increase the WACC for a tax-paying company? Decrease the proportion of equity financing Decrease the proportion of debt financing Decrease the market value of the equity Increase the market value of the debtarrow_forwardIncome taxes have the effect of A. increasing the cost of debt for a firm. B. decreasing the cost of debt for a firm. C. decreasing the cost of equity for a firm. D. Both B and C are correct.arrow_forwardWhat does an increase in the tax rate on corporate profits do to a firm’s coverage ratio? increases it decreases it nothingarrow_forward
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